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Blominvest Issues a HOLD rating on Arab Bank with a Target Price of JOD 6.11/share

Blominvest maintains its HOLD rating on the Arab Bank stock, with a target price of JOD 6.11 per share. However, we expect some price volatility to be witnessed in the short term following the bank’s payment of settlement charges. Underlying economic expectations linked to the bank’s operations remain too weak and unpredictable for a more positive outlook.

Arab Bank’s Net Income is expected to significantly improve by 43.69% to $619.05M (JOD 436.87M) due to the increase in net interest revenue and lower provisions. The bank’s net interest income is expected to gain 8.53% during the year and close at $1.18B (JOD 835.72M) as a result of the increased lending activity expected to arise from the persistence of low interest rates. The bank also announced that it has completed at end-2015 the set of large provisions taken to settle the New York case. Therefore, we expect provisions to substantially decline from 2016 onward.

Arab Bank ended 2015 with a significant downtick in net income. The bank’s net income for the year stood at $442.12M (JOD 312.01M), equivalent to a 23.40% decline from 2014’s figure. In comparison, Blominvest estimated a 2.17% drop from 2014’s results to a Net Income of $564.60M (JOD 398.45M) for 2015.

Arab Bank’s Net Income was primarily dragged down by provisions for legal expenses. These provisions are primarily accounting for the expected $1B settlement of the case against Arab Bank in New York, filed in 2004, regarding accusations towards the bank of financing members of Hamas via their branch in New York. On the income statement, Arab bank recognized $349M (JOD 246.29M) of expenses related to such provisions.

Arab bank’s 2015 income statement revealed an annual increase of 1.46% in net revenues to reach $1.551B (JOD 1.095B), compared to a Blominvest estimate of $1.548B (JOD 1.092B). In detail, the bank’s net interest income totaled $1.09B (JOD 770.03M), up from 2014’s $1.07B (JOD 758.61M) for the year, despite the maintenance of an average interest rate spread of 2.27% on interest-bearing assets and liabilities from 2014. Blominvest estimates placed this figure at $1.08B (JOD 758.86M) with an estimated average rate spread of 2.26%. Meanwhile, net fees and commission income ended the year with a 0.62% decrease from 2014’s close as the average rate on expenses increased to 7.91% from 7.83% in 2014.

On the balance sheet, loans to customers demonstrated a 3.94% y-o-y increase, the best in years, to $22.18B (JOD 15.65B) in 2015, while customer deposits grew at a decreasing pace of 2.29% to $32.80B (JOD 23.15B). Consequently, the bank’s Loan-to-Deposit (LTD) ratio rose from 66.55% in 2014 to 67.65% by the end of 2015. These results reflected the growth of Jordan’s real GDP by 2.8% (IMF forecasts) during 2015, the slightly lower average interest rates on loans from 8.84% to 8.24%, in parallel to the much faster decrease in interests on deposits witnessed over the year, from 5.33% to 4.12%. The spread between interest rates in Jordan ended up widening from 3.51% to 4.12% according to the Central Bank of Jordan (CBJ).

The increases in customer loans and deposits drove the upward movements in total assets by 1.85% over the year to $49.04B (JOD 34.61B).